Silos

The "Silo" functions as the first line of defense in preserving the Protocol's financial solvency. It operates by serving as a reserve of capital designed to liquidate Sheds whose collateral-to-debt ratio is compromised, thereby ensuring that LUCI remains fully collateralized.

Silo Liquidation Mechanics

When a Shed is liquidated, the corresponding debt in LUCI is destroyed from the Silo's reserve, while the collateral from the Shed is transferred into the Silo.

Let D be the debt in LUCI associated with a Shed, and C be the collateral in the Shed. When a Shed is liquidated:

1. The debt D is extinguished from the Silo’s reserves:

1. The collateral C is added to the Silo:

Silo Contributors

Users have the opportunity to become "Silo Contributors" by depositing LUCI into the Silo, targeting specific collateral types. This structure allows users to strategize their portfolio diversification while mitigating risks associated with different asset types.

Let L be the amount of LUCI deposited by a Silo Contributor. The proportion P of their share to the total Silo reserve R is:

Financial Benefits

Over time, Silo Contributors can gain a share of liquidated collateral C. Their share S of any given liquidated collateral is:

This allows Silo Contributors to gradually replace their LUCI deposits with other types of assets. Additionally, due to insurance premiums and administration fees, where F is the additional fees associated with the liquidation. The effective gain G for the Silo Contributor would then be:

By this model, it's anticipated that G will exceed L, making it a lucrative proposition for Silo Contributors.

Assume a Shed is liquidated with D=1,000 LUCI debt and C=1,000 in collateral. If the Silo Reserve is R=10,000 and a Silo Contributor has L=1,000 LUCI in the Silo, and there are F=100 additional fees:

1. Proportion P:

1. Share S:

1. Effective Gain G:

The Silo mechanism offers a proactive method for risk mitigation, aligning with best financial practices seen in sophisticated financial institutions. Over time, Silo Contributors witness a gradual reduction in their LUCI deposits while concurrently acquiring a share of the liquidated collateral. As Sheds are also subject to insurance premiums and administration fees, it is anticipated that the value of the collateral gained by Silo Contributors will exceed the value of the debt they help settle.

Both the Barn & Shed system and the Silo mechanism are integral components designed to uphold the LUCIA Protocol's financial stability and solvency. These interlinked frameworks offer a robust solution for asset management, risk mitigation, and financial benefits for all participants.